Monday, October 27, 2008

"More than 300 online-ad networks have cropped up over the past couple of years, making the business of brokering ads on the Web one of the most popular -- and crowded -- niches on the Internet.

But with the nation's economic woes deepening, there are signs of a shakeout as growth in online spending starts to slow and venture-capital funding begins to dry up.

JellyCloud, a Redwood City, Calif.-based targeted ad network, closed its doors this month after raising $11.5 million in venture-capital funding earlier this year. Adzilla, a similar network in San Francisco, also ceased operations.

San Francisco-based AdBrite, which was founded in 2002 by Internet entrepreneurs Philip Kaplan and Gidon Wise and has raised a total of $35 million in funding, recently cut 40% of its work force to make itself profitable.

Other ad networks "are in severe trouble and could be closing their doors in the back half of this year or the beginning of '09. People are bracing for the worst," says Ross Sandler, an Internet analyst at RBC Capital Markets.

Online-ad networks, which started to emerge about a decade ago, offer marketers a one-stop shop to buy ads across dozens, or even hundreds, of Web sites. Most networks either pay a Web site upfront for the site's advertising inventory and keep the revenue on the ads they sell, or split their ad revenues with the site.

Until now, the business has been fueled by low technical barriers to entry and a flurry of investors looking to cash in on the online-ad market's speedy growth. Venture-capital firms and large media, ad holding and technology companies, meanwhile, have been on an acquisition spree.

But as the climate has soured, network executives say many ad deals in the pipeline have been reduced or pulled. Tight wallets have forced ad agencies to get tough, even canceling ad deals to get a better rate.

Faced with tighter budgets, media buyers say they probably will place their ad dollars with top networks that offer the most-sophisticated technology and are capable of reaching the largest audiences.

But experts say the fallout isn't limited to the small players. Time Warner said in September that its AOL unit, which invested more than $1 billion to create the country's largest online-ad network, was experiencing softening in major ad categories, such as autos, financial, telecommunications and travel -- particularly on the ads it sells on third-party sites."